Earnings Call Transcript - ASO Q1 2025

Dan A. Aldridge, Vice President of Investor Relations

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors First Quarter 2025 Financial Results Call. Participating on today's call are Steve Lawrence, Chief Executive Officer; and Carl Ford, Chief Financial Officer. As a reminder, today's earnings release and the comments made by management during this call include forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our most recent 10-K and 10-Q filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors.academy.com. This morning, we will review our financial results for the first quarter of fiscal 2025, provide an update on our strategic initiatives and to discuss our outlook for the year and share our updated guidance for the full year fiscal 2025. After we conclude the prepared remarks, there will be time for questions at the end. With that, I'll turn the call over to our CEO, Steve Lawrence.

Steven Paul Lawrence, CEO

Thanks, Dan, and good morning to everyone on the call. I'd like to start by covering the subject that is top of mind for most analysts and investors, and that would be how Academy is navigating through the additional tariffs that have been levied since our last earnings call. We, like most people in our business, have been dealing with a fluid situation that has created a lot of complexity in how we forecast and manage our business on a day-to-day basis. We're fortunate that we have a strong team that has navigated through other periods of rapid change such as the pandemic in 2020, the cotton crisis from 2010 and 2011, and the subprime mortgage crisis in 2008 and 2009. The team has drawn on these past experiences to help strategize how to effectively navigate through the current situation. Our first step was for the teams to calculate the impact on the business for the 10% reciprocal tariffs on most countries, coupled with the additional tariffs on goods coming out of China, which are currently set at 30% along with the steel and aluminum tariffs. Once this work was completed, we moved to our second step, which was to work with our factories and suppliers to look for tariff offsets by reducing costs on products. Using this approach, we worked with each supplier in a partnership fashion to help share some of the burden of the incremental tariffs. From there, we moved to step three, which was to work on strategies to help minimize the impact that these additional costs will have on our customers and our internal P&L. The team has taken the following key actions on this front. First, we paused shipments out of China during the period that the tariff rate was set at 145%. Once the rate was lowered, we selectively resumed shipments. Second, we've accelerated our focus on reducing our exposure to products made in China. As we covered in our last earnings call, we've been on a journey over the past couple of years to reduce our direct exposure to China imports, and we're pleased that at the start of the year, our exposure of products sourced from our private brands from China accounted for roughly 9% of our business, which was down from pre-pandemic levels. We have further accelerated our efforts here and reduced this number down to roughly 6% by the end of the year versus our original goal of 8%. We've also leveraged our strong balance sheet to pull in domestic inventory on evergreen products at pre-tariff prices. You can see this pull forward of receipts in our inventory at the end of the quarter, which was up 6.5% on a unit per store basis. Next, we utilized our pricing optimization engine to look for opportunities to offset cost increases through strategic pricing and promotional adjustments. As we work through these changes, our focus was to ensure that the impact on the customer was minimal while also protecting our position as the value leader in our space. We know that when discretionary spending is under pressure, customers look to maximize their spending power by seeking out value. And we plan to capitalize on this and capture market share by continuing to provide the best value in the sports and outdoor space. Finally, each of our branded partners has a different exposure to tariffs based on their unique supply chains. We continue to work with each of them on a case-by-case basis to develop offset strategies. At this point, we believe we have effectively mitigated the cost of tariffs at the current levels while minimizing the impact on our customers. Moving forward, the team will remain nimble and make adjustments if or when the situation changes. Before moving off of the tariff topic, I think it is important to point out that as the situation has evolved, we've continued to see an increase in foot traffic from customers with household incomes over $100,000 annually. This is a pattern we've seen emerge over the past couple of quarters and it is starting to accelerate. We would expect this trend to continue as customers look to stretch their discretionary spending power by seeking out value. Carl will provide more details on tariff impacts and how we think it could influence our customer spending patterns along with our updated guidance for the remainder of the year later in the call. Shifting to the first quarter fiscal 2025 results. As you saw from our earnings release earlier this morning, sales came in at $1.35 billion, which was down 0.9% from last year and translated into a negative 3.7% comp. As we shared on our last call, February sales were soft, primarily driven by cold temperatures and winter storms across our footprint. We saw the business sequentially improve in March, and we exited the quarter with momentum with April finishing with a positive comp. Apparel was one of the two strongest businesses for the quarter, running roughly flat to last year with Sports & Recreation closely following. All three of these businesses started to accelerate once we got past the cold weather in February with warmer temperatures in March and April. Nike was a key sales driver across all three areas, and as you'd expect, was one of our best-performing brands in the quarter. Outdoor was down low single digits, primarily driven by softer sales in ammo. Fishing, firearms, coolers, and drink all posted solid increases for the quarter. We would attribute the momentum we're starting to build in the business to the solid progress we've been making against our long-term objectives and goals. I'd now like to highlight some of the progress we made on our strategic initiatives during the first quarter. New store expansion remains our largest long-term growth engine. We're pleased to see the 2022 and 2023 vintages, which are both not only in the comp base, add positive low single-digit comp growth in Q1. As we discussed on our last call, we're applying the learnings from each vintage to subsequent openings to continually improve our sites watching process. You can see the impact of this in our 2024 vintage, which while not currently in the comp base, is off to a great start, and we expect them to be strong contributors moving forward. We remain on track to open up 20 to 25 new stores this year and opened 5 locations in Q1, including our first locations in Pennsylvania and Maryland. Our store count at the end of the first quarter was 303, and we now include 21 states in our footprint. While we're not ready to give guidance on our targets for 2026, we've thoughtfully slowed the pace of signing deals for the 2026 new stores. This will allow us to get a better handle on how the current tariff situation will impact construction costs moving forward. At this point, we don't expect it to change the overall number of new stores, but it will shift the timing of openings that we originally targeted for Q1 into Q2 or Q3. Our goal is to maintain maximum flexibility as we navigate a rapidly changing landscape. Our second growth pillar is to drive accelerated growth in our eCommerce business. We also made progress here during the quarter with academy.com posting a 10% sales increase and growing in penetration by roughly 100 basis points to over 10%. Our focus remains on delivering a streamlined experience on our site that is intuitive and inspiring. A lot of the work completed in Q1 was around streamlining and improving the internal search functionality of our site. At the same time, we've also been pushing hard to grow our endless aisle offering with an expanded assortment online supported for drop ship. The team has been making solid headway on both fronts, and you can see it reflected in improvements in both conversion rate and average order value during the quarter. Our third growth pillar is to improve productivity and drive the business within our existing stores. As we discussed during our last call, we have multiple initiatives targeted at achieving this goal. A major tentpole of this strategy is delivering new brands and products that inspire customers to shop more frequently at Academy. To this end, on April 23, we launched the Jordan Brand in 145 doors and online. This was the first time that we cross-merchandised apparel, footwear, and accessories together by gender into a branded shop concept. Our Jordan brand offering is focused on sports products at accessible price points. For example, a key shoe for us is the Luka 77, which is a game shoe that someone would actually play basketball in, that can also work as a casual shoe, and it retails for $99.99. While it's still early days, the initial reaction of the customers was strong and the brand is tracking ahead of initial sales plans. Our goal is to expand key items such as cleats for football season into all doors later this summer, and we anticipate the Jordan Brand will be a top 20 brand for us by the end of the year. Our second tactic under this pillar is to better leverage technology to improve our customer shopping experience. Our focus this spring has been on rolling out RFID scanners to all stores, coupled with new handheld devices for our team members. And we just completed the full chain rollout at the end of May. Simplistically, we're leveraging RFID chips already embedded in products from key brands such as Nike, Jordan, and Adidas, to update store inventories on a weekly basis. When we highlighted this technology in 70 stores last year, it led to a 20% improvement in store-level inventory accuracy. Rolling this technology to all stores will help improve our in-stocks, which ultimately will lead to increases in conversion. As we move through 2025, we expect to add more brands to our regular RFID counts such as Levi's, Under Armour, Colombia, Brooks, and Puma. Looking into next year, our goal is to embed RFID tags in most of our private label products, along with working with other national brand suppliers to follow suit where it makes sense. The other piece of new technology are handheld devices which have POS functionality integrated into them. With this new capability, if a customer cannot find something in a store and we own it somewhere in the chain, we can save the sale and get the customer what they need, thereby shipping it to their home or to their closest store for BOPIS pickup, whichever is most convenient for them. As stores have started to use this new technology, we're seeing their stated sale revenue increase 900% on average per store. The last thing I'll cover on our long-range plan is the work we've done to improve our marketing reach and effectiveness. In late April, we launched a new campaign which was created by our new agency of record, McGarrah Jessee, and features our new tagline, Fun Can't Lose. We believe that this new campaign is authentically Academy and is resonating well with our customers. It serves a dual purpose in both driving top-of-mind brand awareness while also reinforcing our strong value messaging. In addition, we're increasing our advertising spend by 10 basis points this year to 2.7% of sales to support this campaign while also spotlighting our Jordan Brand introduction and our new store rollouts. Another key focus on the marketing front is to leverage our new loyalty program to drive value for the consumer. We're planning to add an additional 2 million customers to myAcademy rewards in 2025, which should take us to over 13 million members by year-end. Stronger loyalty program membership will drive growth for us both now and in the long term. Loyal, more engaged customers tend to shop Academy 2 to 3 times more in a year than an average customer and spend 4 to 5 times more on an annual basis. While we're excited about the progress we're making against our long-term initiatives and the momentum we're starting to see in the business, we're also sober about the fragile state of the U.S. consumer and the inflationary pressures we could face as the year progresses. As noted in our Q1 fiscal 2025 earnings release, we're widening our comp sales guidance to account for an expanded range of outcomes. Our balance sheet is strong, and we're confident that we have the right team and strategy in place to effectively navigate through the short-term disruptions for the consumer. On a longer-term basis, we believe our long-range planning strategies and investments are just starting to bear fruit and have a long runway ahead of them and that the future is bright for Academy. I'll now turn the call over to Carl to review the financials in more detail and provide an update on our guidance.

Earl Carlton Ford, CFO

Thanks, Steve. Net sales for the first quarter were $1.35 billion with a comp decline of 3.7%. As Steve mentioned, we saw sequential comp improvement throughout the quarter culminating in a positive comp in April, and our eCommerce channel posted a positive 10% comp for the quarter. Breaking down the comp, transactions were down 5.2% and ticket was up 1.5%. Looking at performance by category, footwear and apparel continue to perform well, and we saw strength in kids apparel, women's athletic apparel, and men's athletic footwear. Athletic footwear posted a positive 4.5% comp, led by brands like Nike and Brooks. To be clear, Jordan Brand products were only in stores for the last 2 weeks of the quarter, but it beat our internal plan in April and in May. Additionally, over 25% of Jordan Brand sales have come from our eCommerce channel, which you will recall only has a 10% penetration for the total business. Within our sports and recreation category, outdoor cooking and baseball posted positive comps as spring started to materialize across the country, especially in our footprint. While we saw encouraging results in baseball, total team sports underperformed primarily coming from softness in basketball and a slower start to the quarter in golf. In outdoors, fishing and firearms performed well, while ammunition, paddle, and power marine remain challenged. We continue to deemphasize the marine categories in lieu of more productive additions like Jordan Brand. In ammunition, we continue to see industry pressure on AUR, so we're implementing some new tactics like bulk promotions to try and offset this impact. Absent these three categories, outdoor is performing very well and in fact would have posted a positive comp. Gross margin came in at 34%, 60 basis points higher than last year, driven by 40 basis points of merch margin expansion and 10 basis points of favorable shrink. The merch margin was impacted by a greater mix of soft goods, and the improvement in shrink is a testament to the work our store and supply chain teams have done to improve inventory accuracy, including the rollout of RFID. SG&A came in at 28.8% of sales for the first quarter, an increase of $36 million or 290 basis points. The increase was primarily driven by growth initiatives for new store support, higher labor in key markets to support the Jordan Brand launch and Nike assortment expansion, and investments in digital and supply chain technologies. 150 basis points were attributable to new store growth, and 60 basis points went to support Jordan Brand's launch and the Nike expansion. To put that into perspective, we invested over $7 million into the launch and expansion that included resetting half of the stores in our fleet. Twenty basis points were related to technology investments in digital and supply chain. As mentioned on the last call, these strategic growth investments would most heavily impact the first quarter, and the associated revenue would not be realized until the following quarters. We expect SG&A to normalize as we head through the year and the investments are completed. Operating income was $69.3 million, and diluted EPS was $0.68. Adjusted EPS was $0.76. Our inventory per store is elevated with units per store up 6.5% and dollars per store up 7.8%. This is an example of using the strength of our balance sheet to invest in the business. We have purposefully made decisions to manage inventory as tightly as possible and have taken the following strategic actions to mitigate tariff impacts and ensure we have value-priced products for our customers. One, we pulled forward $85 million in domestic inventory receipts in the first quarter at pre-tariff prices. The majority of this is evergreen products such as bicycles or free weights, which have no seasonal or obsolescence risk; two, partnered with factories and overseas suppliers to reduce costs; three, reduced over $120 million in inventory receipts to maintain maximum flexibility to respond to evolving landscapes; four, shifted products out of China to alternative countries of origin like Cambodia and Bangladesh; and five, reduced fiscal year 2025 capital expenditures and expenses. These actions have positioned us well to support the spring selling season, and we will continue to evaluate the environment and take further actions as deemed necessary. We anticipate our inventory levels will normalize as we move through the year. We ended the quarter with $285 million in cash and maintained strong liquidity with an untapped $1 billion revolver. Despite the challenged sales environment, we have been able to deliver approximately 8% in free cash flow as a rate of sales, which allows us to make continued investments and return capital to shareholders. In fact, we returned over $100 million of our free cash flow to investors in the first quarter. Turning to capital allocation, we remain committed to balanced and disciplined deployment. During the quarter, we repurchased approximately $99 million in our shares under our current repurchase program, paid approximately $8.7 million in dividends, and invested over $50 million in strategic initiatives including store openings, RFID rollouts, and omnichannel infrastructure. We have the flexibility to adjust our capital allocation priorities during periods of disruption and uncertainty, allowing us to either redirect cash to other strategic initiatives or retain it for financial stability. The cost of materials and construction in our 2025 new store plan are already accounted for. And as Steve mentioned, we have slowed the pace of signing new store leases for 2026. This allows us to better assess the environment and any impacts on construction costs. Moving to guidance. We are updating our guidance range to account for multiple tariff scenarios as we move forward in this uncertain demand environment. Our base case, which is reflected by the midpoint of the range, is that tariffs remain at current levels for the remainder of the year. The high end of the range assumes reciprocal tariffs at 10% for all other countries, including China. The low end of the range assumes China reverts to 145% and the original reciprocal tariffs announced on April 2 remain. We now expect sales in the range of $5.97 billion to $6.26 billion and comp sales of negative 4% to positive 1%. We expect gross margin to be unchanged and earnings per share of $5.10 to $5.90. We expect adjusted earnings per share to be in the range of $5.45 to $6.25. We are also partnering with our national branded vendors to help mitigate costs for the consumer. In the case of price increases from these vendors, we will remain a steward of value for our customers and look to maintain our best-in-market pricing on key items while using our price optimization tool to offset these initiatives. To close, I also wanted to touch on the customer shift opportunity Steve mentioned. We continue to see an acceleration in trade down from the upper income customer tiers as they discover the value offered by Academy. During the first quarter, we saw growth in store traffic by customers earning over $100,000 increase by double digits. We believe these trends will continue to grow as new customers discover the value offered by Academy.

Dan A. Aldridge, Vice President of Investor Relations

Thank you. The company will now open the call for your questions. At the end of the Q&A session, CEO Steve Lawrence will provide closing comments. Our first question comes from Jonathan Matuszewski with Jefferies.

Jonathan Richard Matuszewski, Analyst

The first one was on the higher income consumer. Nice to hear about the ongoing traffic flows from that cohort. I think you started to observe that dynamic maybe 2 quarters ago. So curious if you could comment on the retention of those higher income consumers that you initially maybe welcomed 6-plus months ago. And anything you're seeing from a repeat shopping behavior perspective with that cohort? That's my first question.

Earl Carlton Ford, CFO

Yes, we started to notice a shift in our customer demographics beginning in the third quarter of 2024, particularly among customers earning over $100,000. This trend intensified in the fourth quarter and continued into the first quarter. Our retention rates are strong, with both new customers and those with higher incomes shopping with us more frequently. They are not just purchasing national brands but are also valuing our private brand offerings.

Jonathan Richard Matuszewski, Analyst

That's helpful. And then nice to hear about the positive comp in April. I think you mentioned the Jordan outperformance versus internal expectations continued into May. Curious if that implies the first couple of weeks of 2Q is also showing that positive comp.

Steven Paul Lawrence, CEO

Jordan continues to perform very well and we are very excited about it. In May, we experienced a somewhat uneven shopping environment during the first half of the year, which we discussed in our Q1 results. Currently, May is showing a low single-digit decline. While this is an improvement over the first quarter, it is still slightly down. Nonetheless, we remain optimistic about Q2 being a strong quarter. Customers are gradually starting to shop during key calendar events, with important moments still ahead of us this week, including Father’s Day, which is our biggest week of the year before Black Friday. A lot is riding on this weekend, and we also have back-to-school preparations kicking off at the end of July. We are hopeful for the quarter, even though customer shopping patterns have been quite erratic at the moment.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Pedro Gil Garcia Alejo, Analyst

This is Pedro Gil on for Simeon. Maybe just a follow-up on that last question. That's my first question. If you could double-click on May and maybe talk a little bit about the health of the consumer. If you could sort of parse out the cadence of the quarter, the impact of weather, the Easter shift, and then what the development is in May as far as the category mix and...

Steven Paul Lawrence, CEO

In terms of the quarter, I'll discuss the first quarter. The beginning of the quarter was down in February, largely due to storm impacts and cold weather across the region. March showed some improvement but remained negative. However, April turned positive, driven by the Jordan launch, the Nike expansion, and the shift of Easter from March to April. As we entered the early part of Q2 in May, we approached Mother's Day, which isn't a major event for us. The business started a bit softly, partly due to some lingering cooler temperatures, although it seems more related to unpredictable consumer behavior. Consumers appear to be under pressure and are being very cautious with their shopping and spending. They seem to be waiting to see how the ongoing tariff and trade situation develops and are leaning towards value options. We're pleased to see higher-income consumers beginning to trade down, a trend we've been anticipating for a long time and which has accelerated from last year into Q1 and now into Q2. We expect this trend to continue. As we progress through Q2, we'll fully leverage the benefits from the Jordan and Nike expansions, as well as the rollout of new technologies like handheld devices for store associates and RFID, which were only recently implemented in all stores. We're optimistic about the momentum in our online business and the performance of our new stores. Despite some choppiness in consumer shopping patterns, we believe there are many opportunities still ahead in the quarter.

Pedro Gil Garcia Alejo, Analyst

I appreciate that information. My follow-up question pertains to your gross margin guidance, which remains unchanged. I'm somewhat surprised by the low-end scenario in your guidance, especially considering the full 145% tariff on China and the complete reciprocal tariff announced on April 2 for all other countries. Despite this, you are maintaining the gross margin rate assumption at 34%, the same as what you provided on March 20. Could you clarify your reasoning behind this and discuss the factors at play?

Earl Carlton Ford, CFO

Last year, our gross margin rate was 33.9%. This year's guidance is set at 34% and below 34.5%. In Q1, we increased by 60 basis points, mainly driven by merchandise margin. We experienced improvements in shrink, along with some other factors. The main risk from tariffs relates to the spending power of consumers. There's considerable discussion about the pressure on gross margin rates, but the real challenge for American consumers will be their disposable income. We've proactively managed our inventory, and I’m proud of the team's efforts in anticipating potential impacts in July and August. We are also transitioning away from China, which we've been working on for several years, and that process is speeding up due to current events. We feel assured in our gross margin guidance, thanks to the strategies our merchants are using, particularly regarding inventory management.

Pedro Gil Garcia Alejo, Analyst

Okay. Got it. Wouldn't we be seeing perhaps a lower gross margin rate if we went to buying at 145% and all the other countries have higher tariff rates?

Earl Carlton Ford, CFO

Yes. Yes. I mean, if China goes back to 145%, a lot of things in America are going to change. And so we pulled forward inventory, and we've shifted out of it, and that's our focus area. We're pulling inventory out of China. And we feel good about the inventory that we're carrying at those pre-tariff pricing.

Steven Paul Lawrence, CEO

To clarify, our gross margin guidance is based on a sales-oriented scenario influenced by varying tariff exposures. At the upper end, it assumes global tariffs increase to 10%. Our base case reflects a stable state from our current position. Conversely, the lower end of the guidance accounts for the pauses in reciprocal tariffs, returning to the initial plans set for China and globally. In all scenarios, we've incorporated various strategies in pricing and inventory management to mitigate the effects on gross margins. Carl underscored that we expect a more noticeable impact on sales and customer reactions in an inflationary context, particularly if those tariffs revert to 145%, which would likely lead to higher prices across the board. Our objective is to sustain our value proposition and ensure competitive pricing on our products, though we anticipate some necessary price increases to counteract margin pressure.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Christopher Horvers with JPMorgan.

Jolie Bess Wasserman, Analyst

This is Jolie Wasserman on for Chris. Our first question is about the April benefit from Easter when you're looking at March and April together. And just how are you looking at the business given the March to May with the Easter trend combined with your weather commentary? And on top of that, was there any lift from Nike built into that in terms of how you're thinking about it?

Steven Paul Lawrence, CEO

Yes. So if you look at March and April combined, I think it was down like low, low single digits. But in aggregate, we think that what we really saw benefit April was the combination of the Easter shift. But I would also lean more into the Nike, Jordan launch. That was a big boost for us. Traditionally, after we get out of the holiday, we kind of had a lull. And we really didn't hit that lull this year because we had the Nike expansion and Jordan was positioned right after Easter, and I think that kind of helped us avoid that lull. So we would attribute a lot of the comp positive in April to that launch. As we move in, I kind of highlighted this earlier, we only really got the benefit of that for about two weeks in April. And if you go back to March, one of the things that also probably impacted us a little bit in March was our floors are pretty disruptive. We were resetting the Nike shops, clearing out room for Jordan. We did this on a rolling basis across almost 150 stores on a week-by-week basis, but the stores were pretty kind of disrupted during this time period. And so I think that probably had a little bit more impact on March than we initially anticipated, but we're pleased with the rebound that we saw coming off that in April.

Jolie Bess Wasserman, Analyst

Got it. That makes sense. And just moving to the promotion side. I think you touched on it a little bit earlier. We noticed that quarter-to-date promotions did tick up a bit year-over-year. We saw an additional $20 off $100 coupons that also got extended, some additional e-gift card promotions, et cetera. Also, we saw several promotions like a 25% off Under Armour. So is it fair to say like net-net that quarter-to-date promotions are higher year-over-year? And how much of that is for clearing out for the newness with Nike and Jordan? And how much of that is just related to an overall weaker Academy consumer since a lot of these incremental promotions are entire basket? And just a quick aside on promotions. We also saw the infamous Stanley water bottle was about 40% off. So when exactly did that begin? And speaking to the broader impact of hydration promotions would be great.

Steven Paul Lawrence, CEO

Yes, sure. There's a lot wrapped in that question. I'll do my best to answer it. I would characterize promotions candidly quarter-to-date as fairly consistent with last year. I mean, we're an everyday value-based retailer. And we've cited multiple times that means about 75% of what we sell is at our everyday price. We do have promotions. Those promotions generally happen around the big holiday events on the calendar. So that for us is Memorial Day, Father's Day, Fourth of July, and back-to-school. So you will see promotional activity during those time periods. And when we looked at it, I would tell you it's fairly consistent with last year. In regards to some of the global offers I think you're citing, those may be more driven either through our app or through our site. We're certainly focused very hard on getting people to join our loyalty program. The reason we're focused on that is that we know that we can get somebody into our ecosystem, and we can start target marketing to them and getting them to shop with us more frequently. A more loyal customer shops with us 2 to 3 times more a year. They shop and buy a bigger basket. They tend to be more profitable customers for us and spend almost 4 to 5 times what a normal customer does. So one of the things you're seeing us test into a little bit is trying to offer some good promotions to get people to kind of embed themselves into our ecosystem. And that, when you look at it, we're looking at the price of that one-time discount relative to the lifetime value of the customer more than pays for itself. So I wouldn't read too much into that. In regards to Stanley, Stanley has been on a run for obviously a couple of years now, and I think they have been in a place where they haven't had to take any markdowns on discontinued colors. I think they're starting to have to deal with some colors that are moving out of the assortment moving forward. And so they had a map break on some discontinued colors that we along with I think everybody who carried those colors participated in. That's been going on for about a week now. And I think this is just part of a normal course of the evolution of the business that as the business gets bigger and matures, they have to deal with the obsolete colors. And I think that's what you're seeing there.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Paul Lejuez with Citigroup.

Unidentified Analyst, Analyst

This is Kelly on for Paul. Just want to follow up on the tariff commentary. It sounds like the pull forward of tariffs is accounted for quite a bit of the mitigation this year. So how do we think about the impact of tariffs as we look to F '26? And then I have a follow-up.

Steven Paul Lawrence, CEO

I appreciate the question. The situation is evolving quickly. We've managed to navigate this year effectively. However, forecasting what will happen by the end of the year is uncertain, and we won't speculate. Our focus on diversifying our sourcing, reducing reliance on China, and ensuring we don't concentrate too much in any one country will be crucial. We can no longer simply exit China without concerns; other countries like Vietnam have also faced high tariffs. Thus, diversifying our sourcing is our priority. Looking ahead to next year, we believe that emphasizing our strengths and value proposition will position us well, especially with our growth initiatives such as new store openings and online opportunities. This gives us a positive outlook for the latter half of this year and into next year, though we cannot predict the tariff situation for this time next year.

Unidentified Analyst, Analyst

Okay. Got it. And then just want to follow up on the gross margin guidance. So is the current guidance, I guess, is that assuming all merchandise margin improvement driven? And then, I guess, within that pricing assumptions, what sort of ticket increases are you embedding in that guide?

Earl Carlton Ford, CFO

I think we'll probably tag team on this one. I'll take the first part of that. So our guidance on top line as well as all the way down the P&L kind of models in three different scenarios. The midpoint you can think of as the tariffs that are in place right now; on the high end, it's basically every country at 10%; and then on the low end, it's everything that was paused reverts back in July and August upon those expiration dates. And so as we pulled forward inventory, we feel good about carrying that inventory at pre-tariff pricing. We have no regrets associated with that inventory position. It's going to serve us well throughout. Yes, I would say that not everything will lead to price increases. Initially, we discussed working closely with our factories, which are absorbing some of the costs. In many cases, our national brand partners are also sharing some of that impact. We are analyzing our pricing strategy, using a pricing optimization tool called Revionics to explore different ways to achieve increases in average unit retail. One approach is promotional optimization, where we evaluate the duration and depth of last year's promotions compared to this year's. Another method is markdown optimization, where we adjust prices at the end of a product's life cycle to potentially increase average unit retail. Ultimately, raising prices is a last resort. If we have to implement price increases, our goal is to protect key price points on our private and national brands that attract customers. These increases would likely apply to less noticeable ancillary categories, such as accessories related to major items like bikes or grills. This way, customers can still find great prices on the main items they are interested in, while we consider adjustments on related products.

Unidentified Analyst, Analyst

Got it. And if I could just squeeze in one more. Could you just tell us what the April comp was ex the Easter shift?

Steven Paul Lawrence, CEO

We don't have that broken out. I can tell you it was mid to low single digits in total.

Unidentified Analyst, Analyst

Mid- to low single digits in the total...

Steven Paul Lawrence, CEO

For April, including the Easter shift?

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Robbie Ohmes with Bank of America.

Robert Frederick Ohmes, Analyst

Really just two, one quick one and maybe the other one might be quick as well. Just the softness in basketball and golf that you called out, was that all weather? Or was there anything else there? And then my other question is, I know it's early days, but would love to get initial thoughts on the DICK'S-Foot Locker merger. And if that might create some opportunities for you or how you guys are thinking about that competitively, but I would love to get your thoughts on that.

Steven Paul Lawrence, CEO

Yes. The first question, I would say, you're right. It was probably more weather-related than anything. In terms of the DICK'S-Foot Locker merger, listen, DICK'S is a great company. They're great competitors of ours. We're not going to comment on the rationale for their strategy or what they're doing. We're more focused on what we think our opportunities are. And as we look at this year, we're excited about the trade down we're seeing in higher-end traffic. We're excited about the performance of the new stores. We're excited about the growth we're seeing in our dot-com business. And we really see an opportunity in the remainder of this year in executing our strategy. We're a full-line sports and outdoor retailer and are pretty different from a lot of our competition. We focus on not only sporting goods but also shoes and apparel. We have a big outdoor business that really resonates with our consumer. We also, I think, attract a slightly different customer—a younger family that's really getting into sports. And so we're going to focus on serving our customers and executing our strategy.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Kate McShane with Goldman Sachs.

Emily Ghosh, Analyst

This is Emily Ghosh on for Kate. We were wondering, is your tariff outlook incorporating any elasticity impact from you raising prices? And then how does your outlook take into account the overall health of the consumer in a higher-priced environment?

Steven Paul Lawrence, CEO

Yes, I'm sure Carl and I will tag team this. I would first say that if, in a world where prices are going up, we use our pricing tool to measure elasticity. So certainly, I think there's some assumption that if AURs go up, there is some erosion in unit demand. And so one of the things Carl talked about in his prepared remarks was getting out in front of and canceling some receipts. Some of that to cover the inventory pull forward that we did, but some of it to give us some dry powder so that we can react to what's happening in the marketplace, maybe to take advantage of off-price opportunities. I would say, second, though, in terms of how does this impact the consumer and what is the health of the consumer. I think the consumer is a little skittish right now, and I've seen that in choppy traffic. But as we think about the remainder of this year and you think about a world where inflation is probably realistic to think about, you break it down between discretionary and nondiscretionary spend. From a nondiscretionary spend perspective, you've got food. About 85% of what Americans eat is produced here. So we think that that part of nondiscretionary is going to be somewhat insulated from tariffs. I mean, obviously, I saw some articles yesterday about the price of steel impacting canned food. But we think that food prices should not feel as big a brunt as the rest of the general merchandise in American fields. On the gas front, you've got the administration very focused on holding down pricing there. So I think on the nondiscretionary spend, the customer is going to be okay. So what that puts you in a place of is on the discretionary side, the customer is going to really hopefully have the same amount of money but want to maximize their spending power. And we think when they do that, they're going to trade in for value. And we think that by remaining true to who we are, being the value provider in our space, we think we're going to benefit from that and have more people trade into Academy. And so that's how we're thinking about the health of the customer and how this all plays out for the remainder of the year.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Greg Melich with Evercore ISI.

Gregory Scott Melich, Analyst

I have a question regarding margins, which has two parts. First, concerning the gross margin, I want to ensure I understand the trend accurately. With a 60 basis points increase in the first quarter and the midpoint of your guidance indicating a 25 basis points increase, considering the inventory you purchased, how many quarters do you anticipate before we start to see pressure on gross margin that could offset the benefits from the mix?

Earl Carlton Ford, CFO

Yes. I think the $85 million that we pulled forward was in very strategic categories. I think we think that that's going to get us to the other side of July and August expirations. I think at that point, look, we're going to have to see what the administration does associated with it. But we feel good about holding onto the value proposition through all of this. I really want to underscore that is what's driving these upper quintile customers to us.

Steven Paul Lawrence, CEO

But just to be clear, the character of this merchandise that we pulled in, we described it as evergreen. It is things that, by definition, don't have a markdown liability generally associated with them. Bikes don't go obsolete. Free weights don't go obsolete. Fitness equipment generally doesn't go obsolete. So it's a pull forward of goods that we would have received in the back half of this year, it's on product that is not seasonal in nature and it's at prices that are pre-tariff. So it should allow us to maintain and hold our value proposition as we go into the third and even fourth quarter in some cases for some of these categories. So I don't think you have to worry about this inventory having some sort of a markdown or margin impact down the road. It will not and should not.

Earl Carlton Ford, CFO

Yes. I haven't received any direct questions about inventory, so I want to focus on that for a moment. Inventory is up 15%, which amounts to $200 million. Looking at it from a per store perspective, that's an increase of 7.8%, and I'm pleased with the $85 million pull forward. The merchants did an excellent job of sourcing domestic products without incurring a 10% to 30% price hike in the latter half of the year. Excluding that factor, cost per store has risen by about 2%. It's also important to note the impact of tariffs on the year-over-year growth compared to last year. When adjusted for these two factors, our inventory is actually down by 0.5% per store, while our overall sales are down by 0.9%. I'm proud of the team's inventory management, and I believe it will be a strength for us for the remainder of this year.

Dan A. Aldridge, Vice President of Investor Relations

Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser, Analyst

So quarter-to-date, the comp is negative. Yet Jordan has outperformed what you would expect it to be. Does this suggest that assortment excluding Jordan has actually gotten a little bit worse such that Jordan may not be as incremental as anticipated? And does this not peg the question of if the second quarter is negative despite the Jordan launch, what will it take for Academy to now produce a positive comp? And then I have a follow-up.

Steven Paul Lawrence, CEO

Yes. So no, I don't think it implies some weakness in the overall assortment. Certainly, Jordan is a lift for us, but it's only in half the doors at this point. And it's not dramatically moving the needle yet. I think the Nike expansion that we put out there is driving a bigger comp increase for us because it's just a bigger vendor for us. I think some of the softness we saw in the first quarter in terms of episodic shopping and the customer kind of contracting back when there's not a reason to spend, I think continues into Q2. And I think that's going to continue all the way throughout the remainder of this year, and we've planned that in. I think some of the categories we called out that were soft, particularly ammo, that was soft in the first quarter continued into Q2. I think what moves us to positive comps throughout this year is leaning into the strategies that we've articulated. And I think we're also, as we get in later into this quarter, up against some pretty big slowdowns from last year post Father's Day where we were bringing in a new warehouse management system that impacted our ability to fulfill a chunk of our stores down in the Atlanta area, coupled with some storms. So I think we're still optimistic about the remainder of the quarter and don't feel like there's some underlying softness there that we haven't accounted for in our forecasts and projections.

Dan A. Aldridge, Vice President of Investor Relations

Okay, at this time, we will take one more question.

Unidentified Analyst, Analyst

Okay, that sounds good. You mentioned the strength in higher income groups, which is certainly positive. How would you describe the traffic with your main customer base? I'm considering that if you saw strong growth among higher income customers but had a mid-single digit traffic decline overall, I’m trying to understand what that indicates for your lower income customers.

Earl Carlton Ford, CFO

We view the situation similarly to what you're asking. About one-third of our customers belong to the higher income brackets, specifically quintiles 4 and 5, and they are experiencing growth. Another third of our customers are in the lower income brackets, quintiles 1 and 2, where households earn less than $50,000, and they are decreasing. However, the growth in quintiles 4 and 5 is exceeding the decline in quintiles 1 and 2. The remaining third of our customers earn between $50,000 and $100,000, which is our key demographic. We observed that the core customer group, those earning between $50,000 and $100,000, showed a positive trend in April. I anticipate continued growth in the higher income brackets while we experience losses in the lower income segment. It's crucial that we implement initiatives in our primary markets to attract these core customers and encourage them to shop more often. We've made significant progress in customer targeting. I'm optimistic about the benefits of our technology rollouts in stores, particularly with the sales associate handheld devices and the RFID projects, which are resonating well with the $50,000 to $100,000 customers. If we can engage with the three income brackets effectively, that would be a very positive outcome.

Steven Paul Lawrence, CEO

To close, I also wanted to touch on the customer shift opportunity Steve mentioned. We continue to see an acceleration in trade down from the upper income customer tiers as they discover the value offered by Academy. During the first quarter, we saw growth in store traffic by customers earning over $100,000 increase by double digits. We believe these trends will continue to grow as new customers discover the value offered by Academy.

Dan A. Aldridge, Vice President of Investor Relations

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Lawrence for any final comments.

Steven Paul Lawrence, CEO

Thanks. As I always do, I want to sincerely thank our 22,000-plus Academy team members who tirelessly work to give our customers an outstanding shopping experience. I also want to thank our analysts, investors, and vendors for listening to our call today. Despite the uncertainty we all face, we feel very confident in our strategy and believe that we're well positioned to not only meet the current challenges but come out of this year better positioned than ever to serve our customers and deliver long-term growth. I want to leave you by reiterating a few proof points that give us confidence that our strategies are starting to take hold. First, all the work we put in has helped our eCommerce business run a 10% increase during Q1. Second, the 2022 and 2023 vintages of stores continue to comp positive. Third, we're gaining market share in the face of a challenging consumer environment driven by an acceleration in customer traffic and consumers whose households make $100,000 or greater. And fourth, our Jordan Brand launch and Nike expansion plans are just starting to bear fruit and should provide a tailwind in the remainder of the year. Thanks for joining us today, and have a great rest.

Dan A. Aldridge, Vice President of Investor Relations

Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.